Fixed IncomeSep 9 2016

Hodges: Fund can benefit ‘regardless’ of whether Fed hikes

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Hodges: Fund can benefit ‘regardless’ of whether Fed hikes

Nomura’s Dickie Hodges has been ramping up bets on a US interest rate rise by the Federal Reserve this month as he shorts US high yield and two- and three-year Treasuries.

The manager of the $91m (£69m) Nomura Global Dynamic Bond fund said he was playing a hike in a manner that should leave little impact if it proved an incorrect prediction.

Mr Hodges is shorting two- and three-year Treasuries while going long on 30-year debt, meaning some of his short positions should offset the latter exposure in the event of a hike.

Alternatively, if the Fed decided against tightening monetary policy further – which markets currently place as the higher probability – Mr Hodges said he expected the shorts to fail but the long end of the yield curve to rally, making up any losses.

“Regardless of rate rise expectations the curve will flatten even more, either through bearish sentiment on the two- to three-year part [if there is a rate rise] or bullish sentiment on the 30-year part [if there is no rate hike],” the manager said.

Australian rates
Australia’s central bank has cut rates to 1.5 per cent, and Mr Hodge’s short positions in the country’s banking sector could reach 20 per cent.

With the probability of a September rise in the balance after last month’s Jackson Hole meeting of central bankers, Mr Hodges said the possibility of an increase was not being priced in by the markets. He has introduced an extra trade seeking to capitalise on a rate hike by shorting US high-yield debt.

The manager had a 10.3 per cent short exposure to high-yield corporate bonds at the end of August, and said the move would help insulate his portfolio from a rate rise. With duration less of a factor in the asset class, he said this position would also be able to withstand a lack of action from the Fed.

The Nomura fund’s total duration exposure stands at four years, comprised of a two-year exposure to both Australia and the UK, one year to European bonds via subordinated debt and high yield, and a small negative duration position in US debt.

Mr Hodges said the Australian economy would shortly face a moment of reckoning.

He has shorted bonds issued by several of the country’s banks, but is long government debt in the belief that additional policy easing will be required.

“Australia is a disaster waiting to happen,” he said. “The Reserve Bank of Australia cut rates to 1.5 per cent, but it will have to cut further. There are issues with the country’s housing market, with the mining-reliant western areas already facing a collapse. This could spread to the eastern hubs of Sydney and Melbourne.”

As a result the fund is using derivatives to short lenders National Australia Bank and Commonwealth Bank of Australia. “We are shorting using credit default swaps where the spread is around 65-70 basis points,” he said. “I’d like to short the smaller banks but there’s no CDS market for them.”

The fund has 3 per cent of its risk budget in either short position, and the manager indicated he would be willing to take this to a combined 20 per cent.

“I’m not optimistic about the Australian economy, but I am optimistic that [the country] will have to cut rates and by more than the market is discounting,” Mr Hodges said.

The manager had also taken profits from several securities bought earlier this year.

He allocated 4 per cent of the fund to dollar-denominated bonds issued by miner Anglo American that were yielding 10 per cent, then sold them two months later when the yield dropped below 1 per cent.

The Nomura Global Dynamic Bond fund has delivered 14 per cent since launch in January 2015, marginally behind the Offshore Fixed Interest Global sector’s return of 15 per cent, data from FE Analytics shows.